Defining SPOT: What Are Low Volatility Commodity Monies (LVCMs)?
Many people know SPOT as a #flatcoin — but what does this mean? It is a relatively new term, first mentioned by the likes of Brian Armstrong and Balaji.
We formally defined SPOT as a Low Volatility Commodity Money (LVCM) — a type of digital asset designed to combine the best attributes of traditional commodities and #cryptocurrencies while minimizing their inherent volatility.
The SPOT token exemplifies this concept by being durable, decentralized, and inflation-resistant like gold or #Bitcoin , but with the added benefit of more stable purchasing power, making it suitable for everyday transactions.
So, SPOT is a flatcoin yes, in terms of its purchasing power protection. But in reality, that only scratches the surface of what SPOT and #LVCMs can do ⬇️
Characteristics and Traits of LVCMs
Durability
LVCMs are designed to last and retain their utility over time.
Unlike fiat currencies that can be subject to physical wear and tear, digital assets like SPOT are immune to physical degradation. This is what makes LVCMs like SPOT extremely durable.
Likewise, this gives LVCMs hardened resilience to economic shocks which helps them maintain value over long periods, similar to precious metals like gold.
Decentralization
LVCMs can only operate over decentralized networks, as this ensures that no single entity has control over the currency, which could introduce instability.
Not to mention, decentralization fosters increased trust and security in the performance of the asset over time.
The SPOT token, built off of the Ampleforth protocol and now exclusively owned and controlled by the FORTH DAO, leverages the blockchain to achieve a high degree of true decentralization.
Inflation-Resistance
LVCMs are designed to resist inflation, maintaining their value relative to traditional fiat currencies. This is crucial in protecting purchasing power over time and incentivizing others to adopt LVCMs.
SPOT achieves inflation-resistance as a derivative of AMPL. Ultimately, this is what truly makes LVCMs commodities.
Because AMPL is a unit of account, this means that it is price-stable but supply-volatile.
To achieve price stability, the AMPL Protocol targets a CPI-adjusted US dollar, making AMPL inflation-resistant like other gold or Bitcoin.
Deviations from this price target result in the protocol automatically increasing or decreasing the amount of tokens in user wallets to maintain a steady unit of account.
Mechanisms Behind SPOT as an LVCM
The core innovation behind SPOT is the reorganization of volatility from its underlying asset AMPL, into two new derivatives: SPOT (low volatility) and stAMPL (high volatility). By transferring volatility to stAMPL, SPOT remains stable, providing a reliable medium of exchange.
The process of creating these derivatives is referred to as tranching, where a base asset (AMPL) can be used to create new tranches with varying volatility profiles. SPOT is collateralized with low volatility tranches from AMPL, hence how it inherits AMPL’s inflation-resistant properties.
In the context of SPOT, we have two forms of tranched AMPL:
1. Senior Tranches (affected by volatility last — i.e. SPOT)
2. Junior Tranches (affected by volatility first — i.e. stAMPL)
This is why SPOT is insulated from AMPL supply changes while stAMPL is even more exposed, acting as a type of leveraged AMPL (accepting extra volatility for leverage). This structure ensures that SPOT maintains its stability, making it a practical option for everyday use.
Collateralization
The value of SPOT (and stAMPL) is determined by the redeemable value of its collateral.
SPOT and stAMPL are collateralized by the tranches described above — but importantly they are fixed-term tranches that mature into raw AMPL after a set period (e.g., in 28 days).
In typical states, where all tranches in SPOT’s collateral set are fresh, the token is stable. But in extreme scenarios, where all tranches have matured, SPOT is as volatile as AMPL.
Collateral is continuously refreshed automatically by the $stAMPL Rotation Vault — in which maturing tranches from $SPOT’s collateral set are withdrawn and replaced with fresh ones.
This automated process occurs weekly and can be simplified into a three-step process:
- AMPL is tranched into two derivatives: Junior and Senior tranches.
- Senior tranches go on to collateralize SPOT, while leftover Junior tranches remain in the Vault until maturity.
- Once the Senior tranches reach maturity, they are paired with a dormant Junior tranche and rolled back into AMPL to begin the process again.
This maturity and rotation mechanism helps maintain stability within bounded ranges, ensuring that SPOT can only bend within the bounds of possible volatility but cannot break from it.
Practical Utility of the SPOT LVCM
The SPOT token exemplifies the concept of an LVCM by combining the best attributes of traditional commodities, fiat currencies, and cryptocurrencies, while mitigating their respective drawbacks.
In everyday transactions, SPOT functions as digital cash with predictable purchasing power.
Traditional commodities like gold, which, while durable and inflation-resistant, suffer from significant price volatility. SPOT maintains bounded stability, ensuring that users can confidently use it for routine purchases without worrying about wild fluctuations that could destabilize their purchasing power.
This also makes SPOT highly unique when even compared to prominent crypto commodities like Bitcoin or Ethereum.
Plus, unlike fiat currencies and #stablecoins that do instill confidence in everyday transactions, SPOT also serves as a reliable store of value, protecting it against purchasing power degradation and economic uncertainty.
Compared to stablecoins, SPOT does not rely on centralized reserves, enhancing its decentralization and resilience. Stablecoins carry much higher risks than an LVCM like SPOT because they:
- Offer no protection from purchasing power erosion
- Rely on centralized, off-chain reserves and are censorable
- Rely on artificial stabilization mechanisms to exchange transparent volatility for hidden risks
Scalability
SPOT’s design allows for infinite scalability, driven by market forces rather than centralized control. This scalability ensures that SPOT can grow to meet increasing demand without compromising its stability.
These market forces are driven by incentives associated with minting new SPOT or redeeming old SPOT depending on the market value of AMPL, SPOT’s underlying base asset.
A: When SPOT is trading above the price of AMPL, there is an incentive to mint SPOT, increasing supply until prices align.
B: When SPOT is trading below the price of AMPL, there is an incentive to redeem SPOT, decreasing supply until prices align.
In the case of SPOT, demand for stability propagates into demand for AMPL through minting/redeeming arbitrage. This is unlike other systems where stability demand doesn’t create demand for leveraged ETH.
Conclusion
Low Volatility Commodity Money (LVCM) represents a revolutionary step in the evolution of digital finance, combining the stability of traditional commodities with the innovation of blockchain technology.
The SPOT token exemplifies this concept by offering a durable, decentralized, and inflation-resistant asset with stable purchasing power, making it suitable for everyday use and long-term investment.
To learn more about $SPOT, be sure to check out these resources:
- Website: The official SPOT website
- Docs: The official documentation for the SPOT protocol
- Blog: The official Ampleforth / SPOT blog
- Whitepaper: The official SPOT whitepaper
